With sites like VRBO and Airbnb supplying housing options to vacationers, why not cash in on the trend yourself? There are lots of variables to consider when buying and managing your vacation rental. I’ve listed some of the top things you should consider before moving forward with this type of real estate investment.
Location, Location, Location
When it comes to real estate, “location” has become a cliche phrase for good reason. While it is important to consider when you purchase any property, location is especially crucial when selecting a vacation rental.
First, think about locations in your state or nearby states that are popular tourist destinations. Los Angeles, Miami, New York City, Maui, and Puerto Rico are popular big-city destinations that spring to mind.
Keep in mind, there are also tourists who want to visit national parks, so housing near those locations, like Yosemite or Yellowstone Park or Old San Juan, might be worth looking into as well.
Beach towns are also desirable spots for vacation homes, although the prices generally rise on the property as it gets closer to the water.
If you choose a location that is most popular during a particular season, you will need to consider if you can make a profit while only being able to rent it three months out of the year.
Towns, where tourists flock to ski in the winter or have fun in the sun in summer, may not be as desirable during their offseason.
Although some locations may offer a nice summer climate and good skiing in the winter which could mean you may be able to rent out your property for two season or six months out of the year.
Perhaps you will use the property yourself to vacation during offseason or during a peak season week when your property isn’t rented.
Property Type and Price
How will you figure out what type of property and what price range will work for you?
Try working with your local real estate agent to find properties and selling prices in a range you qualify for.
You may need to decide if you want a small one bedroom in a city center, a house in the suburbs or a beachfront studio. There might be a demand for all of these types of properties. Obviously, you will need to do your research to make sure the property is a viable vacation rental before making a financial investment.
Calculating Your ROI
If your mortgage is $1000 per month, you would need to make at least $12,000 per year to even come close to breaking even on your property. That means if you can rent it for six to eight weeks out of the year for $2000 per week you’ll be almost set.
Look on the VRBO site to see what similar properties are renting for and also check out the calendar to see how far ahead they are booked. Also, be sure to check what months or seasons are the most frequently booked.
You will also need to factor in what you’ll spend on property taxes, homeowner’s insurance, and repairs. There may also be HOA fees associated with the property if so, plan for them to go up over time.
Keep in mind that you may also be paying a property manager and cleaning service. Come up with a ballpark estimate of what everything will cost and add it to what you’ll owe for a year on the house. Then add the mortgage payments to the additional expenses and divide by the number of weeks you feel confident you will be able to rent the property.
Did you come up with a number that seems like a reasonable amount to charge to those who vacation in the area? How does it compare to what a nice hotel charges for a night or a week?
Are tourists likely to stay for just a weekend or a whole week? Will you need to require that guests stay a minimum number of nights?
It’s important to work out the math before jumping into an investment like this. Every investment has risks, but if you have calculated that you will break even and that you can weather any downturns in the market before selling, you should do well if you’ve chosen a popular location.
Perhaps you are even financially comfortable taking a small loss so that you can acquire value over the years before selling the property later for a profit.
Which Site Will Rent Your Property Out?
Here is an idea, try Airbnb or VRBO as a customer to see how it works. Airbnb has the option of renting a private room in someone’s home or an entire house. VRBO specializes in more traditional full home or condo rentals for travelers.
Book a rental home and see what the experience is like from beginning to end. This will help you provide good service and get five-star reviews once your property becomes a vacation rental. What better way to figure out what you might need to add to make it a pleasant stay for your guest?
After your stay, you may realize that adding simple things like a coffee maker, dishes or even a welcome food basket might make renters more likely to visit year after year. Perhaps you decide that having a washer and dryer might be essential for guests who plan to stay for more than a few days, for example.
Once you’ve tested online sites, you may also consider using a local property manager to take care of managing cleaning and maintenance issues. They could also possibly find renters if you’d prefer to go that route instead of using an online service like Airbnb.
Benefits of Buying a Vacation Rental Instead of a Long Term Rental
You might be wondering what would be a better investment for you, buying to rent short term to travelers or purchasing a property that would be a long-term residential rental.
- One of the best perks of a vacation rental is that during the time it isn’t rented you and your family or friends can use the property for your own vacations.
- If you own another residence and want to split your time, living half the year in one city and another half in the tourist destination, this option might work well for you.
- You don’t have to deal with long-term leases, unpaid rent or evictions like you might with a long-term residential rental.
- The best value in this type of real estate investment may be the appreciation you’ll see over time. If you buy and rent a property for part of the year to tourists, this may cover your mortgage and then some. You may find if you wait three to five years, you can sell your house for a large profit. All the while, you were out almost no money because it was bringing in revenue via rent. It’s another way to use the buy and hold method as a real estate investment strategy.
- Tax deductions are another benefit you may be able to enjoy by investing in a vacation rental.
- If things don’t work out financially as you’d hoped with a vacation rental, you still have the option of turning the property into a traditional long-term rental property.
A Real Estate Agent Can Help
Getting in touch with a real estate agent to tour some properties is a terrific first step toward helping you discover if this is the right path for you. An agent will give you comparables in the area and may alert you to hot properties before they are even officially listed.
You might also ask your agent about the best ways to figure out if there are regulations against using certain properties as short-term rentals, this can vary by location. An agent might also be able to give you an idea about possible tax repercussions.
That said, ultimately, you’ll need to do your due diligence before making an investment.
Buying and managing your first vacation rental may become more lucrative than you ever imagined. It’s worth looking into to see if it is the best fit for you.
There has been a lot written on the subject of buying and managing vacation rentals. Following are some links to help you continue your research.
Trey Duling on Bigger Pockets wrote an article entitled 5 Things No One Tells You About Owning Vacation Rentals.
Airdna has an informative article with charts listing the best and worst cities to buy a vacation rental. It’s definitely worth a read to give you a quick overview of what your ROI would likely be in some of the cities listed. It also talks about regulations, which is something that must be considered ahead of time.
USAToday also has a thought-provoking list of 25 places to buy a vacation rental.
Good luck with whatever investment you choose. Happy house hunting!
Evan Zener is the founder of The Strong|Edge Realty Team. Feel free to get in touch if you need his help finding your dream home or if you have any questions about the current temperature of the real estate market in your area.